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Airfares Are Chasing Oil Prices Higher

The price of jet fuel, which is now $2.96 a gallon, has soared by more than 50 percent since last summer’s lows of $1.89 a gallon. An employee pumped fuel into an airplane in Oakland, Calif.Credit
Justin Sullivan/Getty Images

Airline passengers should prepare themselves for sticker shock this year.

As the carriers have tried to keep up with rapidly rising oil prices, they have already increased their fares four times since the start of the year, compared with only three increases for all of 2010. The airlines have also raised some of their fees, imposed summer peak-time surcharges and added hefty fuel surcharges on international flights.

Even traditional low-cost carriers that have long undercut their rivals are joining in. Southwest Airlines, for example, which usually resists industrywide fare increases, participated in several rounds, including one this week.

While the rising ticket prices have matched the steady increase in fuel costs in recent months, the turmoil in the Middle East has sent oil prices sharply higher. That surge now threatens to derail the airline industry’s fragile recovery and may lead to even more surcharges. At today’s prices, fuel accounts for about 40 percent of the industry’s costs, up from about 30 percent just last year.

As a result of the uncertainty in the oil markets, airline stocks extended their losses on Wednesday, after Tuesday’s steep declines. Airline stocks are down 11 percent just this week.

The airlines have few options to deal with their rising costs. Most carriers were already hedging some of their fuel purchases to protect against sudden price increases. They can also look for more fuel-efficient planes, but that requires billions of dollars in investments and takes years. In the meantime, they have little choice but to pass on costs to travelers.

So far, thanks to growing demand from both business and leisure passengers, the airlines have not had any trouble selling seats. Because they have not added much new capacity as the economy has picked up, their planes are still flying full, especially during peak hours. And as airlines continue to find customers for their most expensive fares, analysts said, they are reducing the number of their cheapest seats — and even those are not so cheap anymore.

“Airlines are raising their fares because, right now, they think they can,” said Jeff Straebler, a strategist at RBS. “People will actually buy the tickets at those fares.”

In January, the cheapest round-trip fare from any of the top 50 airports in the country averaged $367 — 10 percent higher that the average of $333 for the same time last year, according to FareCompare.com, a consumer airline research Web site.

Rick Seaney, FareCompare’s chief executive, said each increase in the last three months had averaged $5 to $12 for the least expensive tickets.

The increases have been far steeper at the front of the plane, in business and first class, as well as for last-minute travelers. American Airlines, United, Continental and US Airways all raised their fares by $20 to $60 on Monday for first- and business-class tickets, and seven-day advance. Last week, Delta Air Lines increased its fares for these high-end tickets by $40 to $120 for a round-trip ticket, according to fare watchers.

On top of that, some airlines are also increasing their fees. US Airways recently raised its fees for a variety of overweight and oversize bags — those weighing 75 to 100 pounds — to as much as $175 a bag, from $100. It also raised the cost of a third checked bag, to $125 from $100.

“We’ve had a lot of airfare hike activity compared with the last two years,” Mr. Seaney said.

In recent weeks, the carriers have also bumped up their base ticket prices for travel during the summer by as much as $250, in Virgin Airlines’ case. In addition, the airlines have introduced “peak travel” surcharges of $20 to $60 round-trip on some summer departure dates.

Airlines executives have long dreaded the return of higher fuel prices. In 2008, when oil soared above $147 a barrel in New York, the airlines were forced to ground thousands of planes, including some of the least fuel-efficient planes, in a desperate bid to stem their losses.

But the rise in fuel prices once again hangs over the industry’s profits. Last year, the top eight airlines earned $4 billion with total revenue of $122 billion, showing a meager profit margin of 3.3 percent.

Oil prices jumped more than $12 a barrel this week, rising above $98 a barrel in New York on Wednesday, after the violent uprising in Libya, a major oil producer. In London, Brent crude futures rose to $111.25 a barrel.

The price of jet fuel, which is now $2.99 a gallon, has soared 58 percent since last summer’s lows of $1.89 a gallon.

“Airlines are under a lot of pressure,” said Severin Borenstein, a professor of public policy at the Haas School of Business at the University of California, Berkeley. “Demand is recovering but rising fuel prices may short-circuit that.”

The Air Transport Association said last week that passenger revenue had grown 10 percent in January compared with the same time last year. That was the 13th consecutive month of revenue growth for the airlines.

“We have slightly fuller planes and stronger pricing,” said John Heimlich, the chief economist at the Air Transport Association. “There is no question we are enjoying the coattails of a stronger global economy after a very depressed period. We are making up for lost years.”

Some analysts pointed out that one reason traditional carriers could get away with increasing fares was that Southwest, the largest domestic airline, also saw the need to bolster its own fares.

“Southwest has been acting more like a legacy airline,” Mr. Seaney said.

Prices are inching toward their highest levels, reached in 2008. Still, flying remains relatively affordable, once ticket prices are adjusted for inflation. The average air fare in the third quarter of 2010 — the latest period for which government estimates are available — was 20 percent lower than in 2000 after inflation is taken into account, according to the government’s Bureau of Transportation Statistics.

The airlines, meanwhile, have been resisting an Obama administration proposal to increase ticket fees to help finance airport projects. The president’s budget, released on Feb. 14, would raise the passenger facility charge to a maximum of $7 per flying segment, from the current $4.50, to offset a cut of $1.1 billion to airport grants.

Delta has argued that this increase means that a family of four will pay $112 in ticket fees, instead of $72, assuming they buy round-trip tickets with one stop.

A world of higher fuel prices and higher fees might substantially change the way passengers think of air travel — less a convenient mode of mass transportation and more a luxury, one analyst said.

“Flying is getting more expensive, there is no question about it,” said Robert Herbst, a former commercial pilot and independent airline analyst. “These rising energy costs have to be passed on to consumers. For some, this means flying will become less affordable.”

Correction: March 1, 2011

An article on Thursday about rising airfares misspelled the surname of a strategist at RBS who commented on the airlines’ fare pricing. He is Jeff Straebler, not Streabler.

A version of this article appears in print on February 24, 2011, on page B1 of the New York edition with the headline: Airfares Are Climbing With Oil Prices. Order Reprints|Today's Paper|Subscribe